INDIAN INSTITUTE OF TECHNOLOGY, KHARAGPUR

Dept. of Industrial Engineering and Management

Autumn Mid-Term Examination 2012
Sub: Logistics and Supply Chain Management (1M3 I 008, IM60052)
Total Marks: 50 Time: 2 hrs
Answer all the questions and clearly state the assumptions (if required) with proper reason.

Q. 1. John & Co. is a small manufacturer of servers that currently builds its entire product in Pune,
Maharashtra. As the market for servers has grown dramatically, the plant has reached capacity of
5,000 servers per year. Company is considering two options to increase its capacity. The first option is
to add 4,000 units of capacity to plant at an annualized fixed cost of Rs. 10,00,000 plus Rs. 400 labor
per server. The second option is to have Bhatia & Co., an independent assembler, manufacture servers
for John & Co. at~ a cost of Rs. 1500 for each server (excluding raw materials cost). Raw materials
cost Rs. 7000 per server and John & Co. sells each server for Rs. 13000.

John & Co. must make this decision for a two-year time horizon. During each year, demand for its
servers has an 80 percent chance of increasing 50 percent from the year before and a 20 percent
chance of remaining the same as the year before. Bhatia & Co.'s prices may change as well. They are
fixed for the ~rst year but have a 60 percent chance of increasing 30 percent jn the second year and a
40 percent chance of remaining where they are.

Use a decision tree to determine whether John & Co. should add capacity to its plant or if it should
outsource to Bhatia & Co. (1 0 Marks)

Q. 2. A regional warehouse purchases hand tools from various suppliers and then distributes them on
demand to retailers in the region. The warehouse operates 5 days per week, 52 weeks per year. The
following data are estimated for one product, namely the l-inch drill:

Average daily demand = 100 drills

Standard deviation of daily demand = 30 drills

Supplier Lead Time = 3 days

Holding cost= Rs. 9.40 per unit per year

Ordering Cost= Rs. 35 per order

Service Level = 98 %

Design an inventory system (using Reorder Point Model and Periodic Review Model) for this product.
(10,Marks)

Q. 3. CCD (Cafe Coffee Day) carries a particular brand of tea that has a daily demand of 20 units and a
standard deviation of 5 units. Its current supplier sells tea to CCD at Rs. ·so per unit but requires two
weeks lead time. CCD has an alternative supplier who is willing to supply at Rs. 49.5 per unit but
requires three weeks of lead time and insists on a minimum order size of 500 units per order. The
CCD has an ordering cost of Rs. 200 per order and an inventory-carrying cost of 25 percent. The
management at CCD is of the view that a target level of one stockout in two years is acceptable for
tea. Which supplier should the CCD choose? (10 Marks)
Q. 4. BC Roy Hospital orders its antibiotics every 4 weeks when a sales person from a pharmaceutical
company visits it. Zombacycline, which costs Rs. 25 per capsule, is one of its most prescribed
antibiotics, with an average daily demand of 50 capsules. The standard deviation of daily demand,
derived from examining prescriptions filled over the past 6 months, was found to be I5 capsules. It
takes two weeks for the order to arrive. BC Roy Hospital will like 99 percent of all demand from
prescriptions to be satisfied from stock. The cost to place an order is Rs. I 000 and the holding costs
are 20 percent of the purchase price. The sales person has just arrived and there are currently I,OOO
capsules in stock. How many capsules should be ordered?

BC Roy Hospital has just hired a consultant who has suggested that instead of ordering at the time of
a sales person's visit, the company should monitor its stocks regularly and place an order whenever
they feel appropriate. Devise an optimal ordering policy based on the consultant''S suggestion. What
will be the cost savings if BC Roy Hospital follows the policy suggested by the consultant?
(10 Marks)

Q. 5. Printink, a manufacturer of printing inks, has five manufacturing plants worldwide. Their locations
and capacities are shown in Table I along with the cost of producing I ton of ink at each facility. The
production costs are in the local currency where the plant is located. The major markets for the inks
are North America, South America, Europe, Japan and the rest of Asia. Demand at each market is
shown in Table I. Transportation costs from each plant to each market in U.S. Dollars are shown in
Table 1. Management must come up ~ith a production plan for 2013.

a) If exchange rates are expected as in Table 2 and no plant can run below 50% of capacity, only
formulate the network problem so that it helps an OR manager to find out how much should each
plant produce and which markets should each plant supply? (5 Marks)

b) If there are no limits on the amount produced in a plant, .redesign the network problem so that it
again helps an OR manager to find out how much should each plant produce? (5 Marks)

Table 1

Ca aci , Demand, Production and Trans ortation Costs for Printink

North Europe Japan South Asia Capacity Production
America America Tons/Year Cost!fon
us 600 I300 2000 I200 I700 I85 $ IO,OOO
I300 600 1400 1400 I300 475 15000 marks
2000 1400 300 2100 900 50 1,800,000 en
I200 1400 2100 800 2100 200 13,000 real
2200 I300 1000 2300 800 80 400,000 INR
270 200 I20 190 100

Table 2

US$ Yen INR

US$ I 77.66 55.45
Mark 0.657 51.35 36.44
Yen O.OI3 I 0.7I4I
Real 0.495 33.33 27.35
INR O.OI8 I.4 1
/
Cumulative Standard Normal Distribution

z o.,oo 0.01 0..02. 0.03 0.04 0.05 0~06 0.07 0.08 0.09
0.0 0.5000 0.5040 0.5080 0.5120 0.5160 0.5199 0.5239 0.5279 0.5319 0.5-359
0.1 0.5398 0.5438 0.5478 0.5517 0.5557 O.S596 0.5636 0.5675 0.5714 0.5753
0.2. 0.5793 0.5832. 0.5871 0.5910 0.59-18 0.5987 0.602.6 0.6064 0.6103 0.6141
0.3 0.6179 0.6217 0.6255 0.6293 0.6331 0.6368 0.6406 0.6443 0.6480 0.6517
0.4 0.6554 0.6591 0.6628 0.6664 0.6700 0.6736 0.6772 0.6808 0.6844 0.6879
0.5 0.6915 0.6950 0.6985 0.7019 0.7054 0.7088 0.7123 0.7157 0.7190 0.72.24
0.6 0.72.57 0.7291 0.7324 0.7357 0.7389 0.7422 0.7454 0.7486 0.7517 0.7549
0.7 0.7580 0.7611 0.7642 0.7673 0.7704 0.7734 0.7764 0.7794 0.782:3 0.7852
0.8 0.7881 0.7910 0.7939 0.7967 0.7995 0.802:3 0.8051 0.8078 0.8106 0.8133
0.9 0.8159 0.8186 0.8212 0.82.38 0.8264 0.8289 0.8315 0.8340 0.8365 0.8389
1..0 0.8413 0.8438 0.8461 0.8485 0.8508 0.8531 0.8554 o.asn 0.8599 0.8621
1..1 0.8643 0.8665 0.8686 0.8708 0.8729 0.8749 0.8770 0.8790 0.8810 0.8830
1.2. 0.8849 0.8869 0.8888 0.8907 0.8925 0.8944 0.8962 0.8980 0.8997 0.9015
1.3 0.9032 0.9049 0.9066 0.9082 0.9099 0.9115 0.9031 0.9147 0.9162 0.9177
L4 0.9192 0.9207 0.9222 0.92.36 0.9251 0.9265 0.92.79 0.9292. 0.9306 0.9319
1.5 0.9332 0.9345 0.9357 0.9370 0.9382. 0.9394 0.9406 0.9418 0.9429 0.9441
1.6 0.9452 0.9463 0.9474 0.9484 0.9495 0.9505 0.9515 0.9525 0.9535 0.9545
L7 0.9554 0.9564 0.9573 0.9582 0.9591 0.9599 0.9608 0.9616 0.9625 0.9633
1.8 0.9641 0.9649 0.9656 0.9664 0.9671 0.9678 0.9686 0.9693 0.9699 0.9706
1..9 0.9713 0.9719 0.972.6 0.9732 0.9733 0.9744 0.9750 0.9756 0.9761 0.9767
2..0 0.9772 0.9718 0.9783 0.9788 0.9793 0.9798 0.9803 0.9808 0.9812 0.9817
2..1 0.9821 0.9826 0.98.30 0.9834 0.9838 0.9842 0.9846 0.9850 0.9854. 0.9857
2.2 0.9861 0.9864 0.9868 0.9871 0.9875 0.9878 0.9881 0.9864 0.9887 0.9890
2.3 0.9893 0.9896 0.9898 0.9901 0.9904 0.9906 0.9909 0.9911 0.9913 0.9916
2.4 0.9918 0.9920 0.9922 0.9924 0.9927 0.9929 0.9931 0.9932 0.9934 0.9936
2.5 0.9938 0.99~ 0.9941 0.9943 0.9945 0.9946 0.9948 0.9949 0.9951 0.9952
2.6 0.9953 0.9955 0.9956 0.9957 0.9956 0.9960 0.9961 0.9962 0.9963 0.9964
2.7 0.9965 0.9966 0.9967 0.9968 0.9969 0.9970 0.9971 0.9972 0.9973 0.9974
2..8 0.9974 0.9975 0.9976 0.9977 0.9977 0.9978 0.9979 0.9979 0.9980 0.9981
2..9 0.9981 0.9982 0.9982 0.9983 0.9984 0.9984 0.9985 0.9985 0.9986 0.9986